State, Dept. of Admin. v. Schallock
941 P.2d 1275, 248 Ariz. Adv. Rep. 3, 189 Ariz. 250 (1997)
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Rule of Law:
An employer may be vicariously liable and thus obligated to indemnify an employee for sexual harassment if the employee's acts, though tortious and personally motivated, occur within the "course and scope of employment" or "authorization" as defined by agency principles, particularly when the employer knew or should have known of the conduct and the employee used the authority delegated by the employer to commit the acts. A directed verdict that is not reduced to a final judgment due to settlement does not have preclusive effect under collateral estoppel.
Facts:
- Colleen Schallock, a law student, and Bertha Saunders, a secretary, worked at the Arizona Prosecuting Attorneys Advisory Council (APAAC).
- Allen Heinze was the executive director of APAAC and answerable only to its members.
- Over a period spanning almost a decade (between June 1984 and fall 1990), Heinze frequently made off-color comments, vulgar gestures, sexual jokes, and inappropriately touched female employees at the office or related locations.
- Heinze physically assaulted Saunders, including touching her crotch, buttocks, and breasts, and attempting to force her to kiss him. At a seminar in June 1984, he entered her hotel room, made sexual comments, and forced himself upon her.
- Heinze at least twice touched Schallock's breasts and put his hand down her skirt. At a conference in Sedona in summer 1988, he propositioned Schallock, offering job assistance while touching her thigh, and later raped her in a hotel room.
- After Schallock no longer worked at APAAC in December 1988, Heinze insisted she have lunch with him, assaulted her again, and threatened her if she revealed the rape.
- Some APAAC staff attorneys and Council members had observed Heinze's improper conduct or received complaints about his use of sexually explicit language and pejoratives over the years.
Procedural Posture:
- Colleen Schallock and Bertha Saunders filed separate lawsuits against Allen Heinze and the Arizona Prosecuting Attorneys Advisory Council (APAAC) seeking damages for sexual harassment.
- In Schallock's tort action, a jury returned verdicts finding Heinze personally liable for intentional/reckless infliction of emotional distress and/or sexual harassment for $1,476,535.50.
- The jury also found APAAC liable for intentional infliction of emotional distress and/or sexual harassment for $908,446.50, and separately for negligent hiring, supervision, and retention for the same amount.
- Prior to entry of judgment, the State (insurer) and Schallock entered into a "high-low" settlement agreement under which, if a verdict were returned against APAAC, Schallock would dismiss the action against APAAC.
- Fireman's Fund, the state's insurer, paid Schallock $725,000 in full settlement of the $908,000 verdict against APAAC, and judgment was never entered on the verdicts against APAAC.
- The $1.4 million verdict against Heinze was reduced to judgment but remained unpaid.
- The State filed a declaratory judgment action in trial court against Heinze (and others), claiming it had no duty to indemnify Heinze because his acts were outside the course and scope of his employment under A.R.S. § 41-621.
- In Schallock's underlying tort trial, the judge had directed a verdict on the vicarious liability issue, finding Heinze's actions were in the course and scope of his authority for APAAC; however, this order was never merged into a final judgment due to the settlement.
- The trial court in the declaratory judgment action granted summary judgment in favor of Heinze, concluding that collateral estoppel applied based on the directed verdict in the tort case, requiring the state to indemnify Heinze.
- The State appealed this decision to the Arizona Court of Appeals.
- The Arizona Court of Appeals reversed the trial court's decision, holding that collateral estoppel did not apply because the directed verdict was not reduced to judgment, and concluded as a matter of law that Heinze’s acts were not in the course and scope of employment, granting summary judgment in favor of the State.
- The Arizona Supreme Court granted review on two issues: collateral estoppel and the interpretation of "course and scope of employment or authorization" for indemnification.
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Issue:
1. Does collateral estoppel apply to a directed verdict on the issue of an employee's "course and scope of employment" when that verdict was not reduced to a final judgment due to a settlement between the parties? 2. Were Allen Heinze’s sexual harassment acts against subordinate employees within the "course and scope of employment or authorization" for purposes of indemnification under A.R.S. § 41-621(A)(3), precluding summary judgment for the State?
Opinions:
Majority - Feldman, Justice
No, collateral estoppel does not apply where a party has fully litigated an issue to a verdict but a judgment has not been entered because of a settlement between the parties. The court clarified that Arizona law, as established in Chaney Bldg. Co. v. City of Tucson and City of Glendale v. Aldabbagh, requires both actual litigation and the entry of a final judgment for collateral estoppel to be applicable. A verdict, such as the directed verdict on the course and scope of employment in Schallock’s tort case, lacks finality without a formal judgment and therefore cannot be used as a basis for collateral estoppel or res judicata, as explained in State v. Williams. No, the present record does not establish as a matter of law that Heinze’s acts were not within the course and scope or authorization of his employment, meaning the issue cannot be resolved via summary judgment for the State. The court disagreed with the Court of Appeals' conclusion that Heinze's actions were, as a matter of law, outside the course and scope of his employment, noting that the lower court conflated principles of direct and vicarious liability and overlooked the "authorization" component of A.R.S. § 41-621(A)(3). Applying Restatement (Second) of Agency principles, the court reasoned that conduct within the scope of employment can be either of the same nature as authorized or incidental to it (Restatement § 229(1)). Heinze's acts largely occurred at APAAC's office or business-related locations during work hours. Given that APAAC was aware of Heinze’s egregious improprieties for almost a decade and did little to stop them, a jury could reasonably infer that APAAC knew or should have known of the work environment and effectively authorized his abusive acts (Restatement § 219(2)(b)). While acts must be partly motivated to serve the master (Restatement § 235), Heinze’s mixed motives (running the office and personal desires) do not automatically negate course and scope, as the relevant purpose is whether he was generally conducting APAAC’s business, not whether he had authority to harass. Forbidden or even criminal acts can fall within scope if related to authorized duties, citing State v. Pima County Adult Probation Department and federal Title VII cases that apply common law agency principles, which emphasize the time, place, and foreseeability of the acts, particularly when a supervisor uses delegated authority. Furthermore, the court clarified that "authorization" in the statute extends beyond "course and scope" to encompass situations where an employer is vicariously liable because a servant purported to "act or speak on behalf of" the master and "was aided in accomplishing the tort by the existence of the agency relationship" (Restatement § 219(2)(d)). Heinze, as executive director, was entrusted with control over APAAC's business and employees. APAAC arguably maintained him in this position for years, knowing of his propensities and lacking formal anti-harassment policies. The record indicates that Heinze utilized the power and authority granted by APAAC to create and maintain a sexually abusive environment, precluding summary judgment for the State on this ground.
Analysis:
This case significantly clarifies the application of agency law principles, particularly Restatement (Second) of Agency § 219(2)(d), to employer liability for supervisory sexual harassment in Arizona. It emphasizes that "course and scope of employment" and "authorization" can encompass even egregious intentional torts, especially when the employer has actual or constructive knowledge of the supervisor's conduct and the supervisor leverages their position of authority. The decision aligns Arizona common law with federal Title VII interpretations, reinforcing the idea that an employer's inaction or tolerance of a hostile work environment can be seen as implicit authorization. This broadens potential employer liability for supervisory misconduct, making it harder for employers to escape indemnity obligations through summary judgment simply by claiming the acts were outside the scope of employment.
